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What if the national debt limit isn't increased?

As President Barack Obama and a bipartisan group of lawmakers prepare for a summit today at the White House to discuss reducing government spending and raising the debt ceiling, the question remains:

What happens if Congress doesn't raise the $14.3 trillion debt limit before Aug. 2?

No one knows for sure. Congress has always agreed to raise the debt ceiling. And that will most likely happen this time, eventually. But as late as Friday, Republican House Speaker John Boehner was still saying there's no "imminent deal."

So, assuming we reach Aug. 2 with no agreement, the Treasury Department would not have authority to borrow any more money. That's a problem because the government borrows to make up the difference between what it spends and what it takes in.

The Bipartisan Policy Center, a think tank established in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell, has released an analysis that shows federal spending would have to be reduced by as much as 44 percent for the remainder of August as the Treasury prioritizes payments to remain under the debt limit. Here's one scenario the center created to show what that might look like:

In August, the government will collect $172.4 billion.

If Treasury decides to pay ...

Interest on Treasury securities $29 billion

Social Security benefits $49.2 billion

Medicare/Medicaid $50 billion

Defense vendor payments $31.7 billion

Unemployment benefits $12.8 billion

Total cost: $172.7 billion

... then it couldn't pay for these programs, worth $134 billion:

Military active duty pay $2.9 billion

Veterans Affairs programs $2.9 billion

Federal salaries and benefits $14.2 billion

Education Department (Pell grants, special education programs) $20.2 billion

• Food/nutrition services (food stamps, Women, Infants and Children Program) $9.3 billion

• Department of Justice (FBI, federal courts) $1.4 billion

• IRS refunds $3.9 billion

• Small Business Administration $0.3 billion

• Housing and Urban Development (housing assistance for the poor) $6.7 billion

• Other spending* $72.2 billion

* Labor, Environmental Protection Agency, Health and Human Services, NASA, Commerce, General Services Administration, Energy, Interior, Federal Transit Administration, Federal Highway Administration, Agency for International Development, etc.

What would happen if the government stopped paying its bills?

Here's an answer from the Pew Charitable Trusts: Short of a default, the uncertainty surrounding potential missed payments by the government might lead investors to sell federal securities or demand higher interest rates. That could result in financial upheaval as federal borrowing costs spike and demand for U.S. assets falls. In addition, because Treasury securities play a fundamental role as a safe asset in global financial markets, a default (or the anticipation of a default) by the federal government and accompanying rise in interest rates could potentially have wide-ranging impacts on global markets, although the specific effects are unclear. Ultimately, the consequences of a default will depend on how investors respond to uncertainty surrounding the debt limit.

Compiled by Times staff writer Ron Brackett

Or Obama could just ignore the limit.

Bruce Bartlett, a Reagan White House policy analyst, wrote in a column in the Fiscal Times that the president didn't need Congress' permission to raise the debt limit. "The debt limit is statutory law, which is trumped by the Constitution which has a little known provision that relates to this issue," Bartlett wrote. "Section 4 of the 14th Amendment says, 'The validity of the public debt of the United States … shall not be questioned.' '' The way he read it, if Congress wouldn't raise the debt limit, the president could start creating debt anyway. "Constitutional history is replete with examples where presidents justified extraordinary actions by extraordinary circumstances."

Obama sidestepped a question about the 14th Amendment on Wednesday during the White House's Twitter town hall. He didn't say he wouldn't use it but did say, "I don't think we should even get to the constitutional issue."

Using the 14th Amendment to issue debt has never been done before and would be highly controversial.

To read more about Bartlett's argument and to find the complete Bipartisan Policy Center analysis and more information about the national debt ceiling, go to links.tampabay.com.

What if the national debt limit isn't increased? 07/08/11 [Last modified: Monday, July 11, 2011 1:07pm]
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